HJ Sims Market Commentary: Higher Coupons Meet With Strong Demand

by Gayl Mileszko

When asked about our favorite TV commercials, several always spring to mind. There are the ones that make us laugh, like the 1984 Wendy’s campaign when Clara lifts the bun and asks “Where’s The Beef?” or the giddy Geico camel in the 2013 Hump Day commercial. There are others that make us motivated, like the “Just Do It” slogan that became a core part of the Nike brand in 1988. Then we have the ads that touch our hearts, like the Super Bowl Coke commercial with Mean Joe Greene and the kid in the locker room or the Kodak Times of Your Life series. Commercials like “Time to Make the Donuts” and “The Best Part of Waking Up is Folgers in Your Cup” resonate with morning people everywhere. Ads with certain clever jingles tend to stick in our heads: the Oscar Meyer Wiener song, Every Kiss Begins With K, Nationwide is on Your Side. And some become inextricably linked with popular songs, as with Heinz Ketchup and Anticipation, Chevrolet and Like A Rock. The most successful campaigns, including the Energizer Bunny, the California Raisins, the Aflac Duck, Budweiser frogs, Calvin Klein jeans, and Maytag Repairman, make you remember the product forever.

Budgets for Marketing

Advertising is a $710 billion industry and the U.S. is by far the biggest market. In 2021, more than $285 billion was spent on digital and traditional media. Anyone running a business knows that marketing is vital to its success. But making prospective customers aware enough of your products and services to generate interest, commitment and action is not cheap. The U.S. Small Business Administration recommends that companies with revenue of less than $5 million allocated between 7% and 8% of total revenue to marketing. Deloitte estimated the average marketing percentage of all business revenue at around 13% in 2021. For some start-ups, for non-profits, for those walloped by the pandemic, a hurricane, flood, drought, crime, new competition or bad press, a lot more may be required at a time when operating margins afford no room. Senior living operators have been among the hardest hit during the pandemic and, despite all the resident testimonials, supportive demographic trends and government stimulus, they have found themselves in the position of needing to get very creative within an extremely limited budget for promotional work while working hard to provide for the safety and welfare of residents, their families, their employees and their communities as a whole.

Senior Living Campaigns

For the past two and a half years, managers of independent living, assisted living, memory care and skilled nursing facilities have needed not only to safeguard those who reside within but to advocate and scramble for new resources and undertake new public relations campaigns to restore the reputation of the entire industry. Most have had to reach out to their elected officials for assistance, and many have had to deal with media for the first time. All have had to scrape up funds to suddenly incorporate new digital tools to serve urgent resident, family and staff needs while attempting to make heads tilt in a more positive direction to the essential services they provide. How does the senior living industry position and market itself going forward? Many can rely upon their strong brands and history of service in their respective communities and the endorsements that come from residents, staff, families and local referral sources. Quite a few can call upon their sponsors and affiliates for promotional support. Some smaller standalones have become nimble enough to adapt quickly to changing demand for new home configurations, rental and entrance fee arrangements, special services and amenities. A growing number have become laser-focused on Baby Boomers seeking more niche- and affinity-based communities. Smart technology, including robotics and artificial intelligence, as well as eco-friendly features are also being incorporated and advertised.

Financing Senior Living and Care Communities

After more than 85 years in the business, we at HJ Sims are in close touch with sponsors, owners, operators, managers, boards and residents all across the country. Our bankers and analysts frequently comment on the latest trends and developments in events we sponsor and articles we pen. It should come as no surprise that we are finding greater demand for more personalized services, concierge availability, and new emphases on outdoor activities and volunteer opportunities. As we continue to help vibrant communities attract new residents from diverse backgrounds, we are also assisting new ones geared toward those who have very specific care needs, come from artistic, academic, athletic, military or religious backgrounds, love dogs or gourmet dining, or are more environmentally- or intergenerationally oriented. So far this year, we have seen more than forty new senior living deals come to market in order to build or expand senior living and care facilities, each with its own story to tell, each with its own jingle. HJ Sims has underwritten more than a quarter billion of these financings so far this year and, as we prepare the next series of offerings, we invite you to contact us for more details on how uniquely we structure and market each transaction.

Municipal Bond Sales

The municipal primary market calendar this week includes only one senior living financing: a $25 million BBB+ rated transaction for Diakon Lutheran Social Ministries issued through the Maxatawny Township Municipal Authority in Pennsylvania. The $6 billion slate also includes five charter school deals: for BB rated Collegium Charter in Exton, Pennsylvania; BB+ rated Hawking STEAM Charter School in Chula Vista, California; AAA-rated state guaranteed Great Hearts Texas Academies; non-rated Coral Academy of Science Reno, Nevada; and Aa2 state credit-enhanced Spectrum Academy in North Salt Lake, Utah. Last week, we noted that the $49.9 million non-rated charter school transaction for Legacy Traditional Schools-Texas sold with a final maturity in 2062 priced with a coupon of 6.75% to yield 6.15%. The Greenwood Charter Academy in South Carolina brought a $24.9 million non-rated start-up financing that also had a single 40-year maturity which priced at par to yield 7.50%. The Lanier Christian Academy in Flowery Branch, Georgia sold $11.9 million of non-rated bonds structured with a 30-year term bond priced at 6.25% to yield 6.75%. The Dual Immersion Academy in Salt Lake City had an $8.7 million non-rated issue due in 10 years that priced at par to yield 5.65%. Utah’s Ogden Preparatory Academy also borrowed $12.8 million in an AA rated financing that included 35-year term bonds priced with a coupon of 4.625% to yield 4.75%.

Higher Coupons Meet With Strong Demand

At this writing, as the month of August comes to a close, municipal bonds have not posted a positive session of gains since the second trading day of the month. High yield munis remain one of the best performers in a world of negative returns but investors who have been directing cash into high yield funds for the past two months reversed course last week amid the market volatility created by uncertainty surrounding the Federal Reserve’s next policy moves. This comes at a time when individual bond buyers are finally seeing new issues come with higher coupons for the first time in five years. In these high inflationary times, households, insurance companies, conventional and exchange-traded funds, foreign buyers and others continue to present heavy demand for tax-exempts. At this writing, with only one trading day left to finish this month, the two-year top-rated general obligation bond yield at 2.26% has risen 66 basis points in August. The 10-year yield has increased from 2.21% to 2.59%, and the 30-year benchmark at 3.21% is 40 basis points higher. The front part of the municipal yield curve (1-year to 5-year maturities) is no longer inverted, but the difference between the 2-year and 10-year rates has narrowed from 61 basis points to 33 basis points. The short Treasury curve has been inverted since July 5. The 2-year yield at 3.44% remains higher than the 10-year at 3.10% and the 30-year at 3.21%. The difference between the 3-month and the 10-year yields has narrowed this month from 33 basis points to 18, and the MOVE Index, a gauge of the implied volatility on 1-month Treasury options, has increased by nine percent and stands 30% higher than its one year average

Reach Out To Your HJ Sims Representative This Morning

Many investors are putting off investment decisions until after Labor Day, but we are here and welcome your calls and questions. Unlike Fred the Baker in the famous Dunkin Donuts commercials, we remain enthusiastic about the many income opportunities we find early every day. All year long, we have been hard at work identifying traditional and alternative investment value for our customers, as we do in every market cycle. We know that the next one may be shaped in large part by investor reaction to the first $95 billion runoff from the Fed’s $9 trillion portfolio starting on Thursday, economic data that may significantly differ from expectations, and/or actions taken at the September 21 Federal Open Market Committee meeting. Current futures trading shows that Wall Street “bakes in” a 70% chance of another 75 basis point rate hike, and a year-end target rate closing at 3.75%.

Labor Day

Markets will be closed on Monday as America takes the long weekend to mark the end of summer and celebrate the many contributions to the strength and prosperity of our nation made by our civilian workforce of 163.9 million and our active-duty military and reserve forces numbering 1.97 million. We are also very mindful of the 5.7 million who are actively seeking work and the employers who are actively looking to fill 11.2 million job openings. At HJ Sims, we wish you and your family a safe and happy Labor Day and a wonderful start to the new school year.

For more information on offerings or questions about current market conditions, please contact your HJ Sims representative.

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